A double whammy

15 Apr 2019


The lethal combination of low growth and high inflation has hit the economy, which means a double whammy for its 208 million people.

This is perhaps the worst thing for any economy, especially when it requires a growth rate of over seven per cent to absorb a large youth bulge.

Simply put, low growth means no more job creation and wage improvement — thus higher unemployment — on the one hand and high inflation on the other. That usually leads families to cut down on the quality of food and health expenditure — a recipe for higher levels of poverty.

Economists describe such a combination as stagflation — the worst of both worlds. When inflation goes up, growth decelerates and unemployment stays high. It leaves policymakers with few policy choices. The irony is that the low-growth-high-inflation cycle usually takes time to recede.

Most of the leading lending institutions forecast that Pakistan is now faced with that dilemma owing to a combination of the legacy impact and the indecisiveness of the incumbent government. After all, it is the prolonged uncertainty, and not the shock therapy, that exacerbates the deficiency of economic confidence.

Finance Minister Asad Umar concedes that tough conditions will prevail for at least one and a half years

All these institutions agree that the economic growth rate, which has suffered significantly this year, will further deteriorate amidst even higher inflation next year. However, their projections vary.

Finance Minister Asad Umar concedes that tough economic conditions will prevail for at least one and a half years.

As the government signs up for a three-year stabilisation programme later this month, the IMF projects that the growth rate will decelerate to 2.9pc and 2.8pc in 2018-19 and 2019-20, respectively. In its flagship World Economic Outlook report, the IMF forecast mid-term growth prospects for Pakistan to remain subdued at 2.5pc until 2024.

The fund attributed its negative outlook to fuel prices and macroeconomic challenges that Pakistan faces at present and the impact of a relative slowdown in the global economy. The Fund projected that the consumer price index (CPI) would be 7.6pc for the current fiscal year. It would come down to 7pc in the next fiscal year and then stabilise at 5pc by 2024.

In contrast, the IMF estimates the current account deficit is going to be 5.2pc of GDP during the current fiscal year. It will come down to 4.3pc of GDP next year before rising again to 5.4pc by 2024. Yet, the unemployment rate is anticipated to stay largely flat at 6.1pc during the current year. It expects this rate to be 6.2pc in the next year and remain in the same band by 2024.

Last week, the World Bank projected that Pakistan’s growth would decelerate to 3.4pc during this year and further dip to 2.7pc next fiscal year as the government tightens fiscal and monetary policies. However, it expects the growth rate to recover to 4pc in 2020-21.

The troubling part is that the World Bank projects inflation will rise from 7.1pc to 13.5pc next year as a result of the exchange rate depreciation and the second round of the energy price increase. This will happen provided that the international oil prices remain stable and political and security risks come down.

But this is hard to expect: a powerful regional enemy is keeping the nation on high alert while those in power are more interested in prolonging political tensions than addressing them.

The World Bank also supports the argument that the delayed finalisation of the IMF programme increased economic uncertainty. Regional tensions added to the risk perception as low reserves and high debt ratios curtailed the buffers required to absorb external shocks. This has already affected the government’s ability to access international capital markets.

Projections by Manila-based Asian Development Bank (ADB) are on the higher side, but their direction is similar to that of the IMF and the World Bank. It projected that Pakistan’s growth would decelerate further to 3.9pc during the current year as macroeconomic challenges continue despite the tightening of fiscal and monetary policies to rein in unsustainable twin deficits.

“Continued fiscal consolidation in FY2020 will keep growth subdued at 3.6pc,” ADB said. The supply side is already showing signs of a slowdown. Agriculture is expected to underperform the 3.8pc growth target for 2018-19. Large-scale manufacturing reversed the 6.6pc growth rate achieved in the first half of 2017-18 to decline by 1.5pc in the same period of the current fiscal year as domestic demand contracted and rising world prices curtailed demand for raw materials. Contraction hit all key categories, including a 0.2pc decline in textiles.

On top of that, the IMF forecast that the fiscal deficit would continuously be close to 8pc while the debt-to-GDP ratio would deteriorate to 86pc over the next five years. It estimated that the fiscal deficit would increase to 7.2pc in the current year and then peak at 8.7pc of GDP in 2019-20. It forecast that the budget deficit would come down to 8pc of GDP in 2021.

Published in Dawn, The Business and Finance Weekly, April 15th, 2019